A fundamental shift looks set to occur across the property market.
Capital gains will be harder to come by and speculative and short-term investors will make way for longer-term ones, more focused on yield and cash-flow. The same shift is set to occur in the dairy industry.
It's welcome, though it will create economic challenges. As capital gains become harder to etch out and asset value adjust, replacement sources of growth will be needed, and quickly if the transitional costs of change are to be minimised.
A decade on from the global financial crisis (GFC) and we have even higher debt levels. Borrowers are being protected by low interest rates, for now.
Central bank are wary of the financial stability risks high leverage brings.
Surging house prices have contributed to inequality, intergenerational inequity and a middle-income class of poor.
They have income to service a mortgage but not much is left to live on. Each additional increment of credit added has less to gross domestic product.
Across asset classes we now have stretched valuations, tighter credit conditions, growth in a mature stage of the economic cycle, the social conscience of society being pricked as intergenerational issues come to the fore, potential foreign investment restrictions, a basing in interest rates and a pending turn in the global liquidity cycle as the US Federal Reserve lifts interest rates.
Various asset classes face a raft of other changes or potential changes. In housing we have the pending removal of negative gearing, we have restrictions on foreign buyers.
A capital gains tax is inevitable.
The bright-line test has gone from 2 to 5 years. A shift in the landlord-tenant relationship towards the latter is underway.
Landlords are facing extra costs as requirements to provide healthier homes increase.
The Reserve Bank wants a debt-to-income prudential policy tool. They should be given it. It will be more effective than loan-to-value ratio restrictions.
The potency of loan-to-value restrictions can be diluted if the property market keeps rising.
That's a big list of changes and it's by-and-large positive for the property market in the long term.
Eyes will be on how investors react in the near term though. Will they flee markets where rental yields are very low? That's Auckland in the first instance where rental yields are below borrowing costs. You need the capital gain. There isn't any in Auckland at present.
Some argue that ring fencing and other initiatives targeting the property sector will scare off investors and crimp housing supply.
It may scare off the speculative investors but not those focused on cash-flow. Long-term investors should not be perturbed. They won't buy the asset based on capital gain, but rather the underlying yield and cash-flow.
The only issue is how far prices adjust before the longer-term yield-based investors are enticed into the market.
In the dairy industry we have pending environmental taxes and shifts in freshwater regulations. Some will have to de-stock to meet environmental requirements.
The dairy sector etched out a 4-6 per cent cash return and a 5-6 per cent capital return. Both will be hard to sustain.
There are still some solid fundamentals; we have a shortage of housing, unemployment is falling and dairy sector incomes are solid and will likely get better with the New Zealand dollar under pressure.
We remain in a low interest rate world and money is still looking for a home.
However, times are changing, and quickly. Weaning the economy off a capital gain mantra won't be easy and will create economic potholes.
Rising asset prices not only boosted spending, they make that next investment easier to finance. The challenge is to find economic replacements — and quickly, such that the potholes don't turn into a crevasse.
- Cameron Bagrie is managing director of Bagrie Economics.